The Missing Piece

Ariane Chapelle

Almost a decade after its proliferation in the financial sector, risk appetite continues to raise questions. In operational risk, firms continue to struggle with the concept, as well as expressing it and translating it into action.

Having worked with firms for years on the topic, I observe that the wording is particularly ill-chosen. Why would you have an “appetite” for risk? Furthermore, an appetite for risk doesn’t make sense on its own without its necessary corollary: the expected return or expected benefits. Expected return is the missing piece that makes risk appetite exercises cumbersome and illogical. This is why many have difficulty when attempting to express an appetite for operational risk.

The origin of this is the false idea that operational risk, unlike credit or market risk, is only a downside risk – in other words, you make no money for taking operational risk.

On the face of it, this seems correct. Credit loan margins are visible remuneration for risk-taking in credit; insurance margins are the visible manifestation of underwriting activity; and trading revenue is the happy counterpart of market risk. What is the upside of operational risk? We can’t see it

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